Solow growth model style discussions applied to China… reversion… convergence… continued growth?

Many of the most bullish forecasts of China’s economic future are based, more or less, on extrapolation. For more than three decades, its economic output per person has been rising at an extraordinary annual rate of 6 to 10 percent, climbing rapidly toward levels in the richest nations. If that continues for a couple of decades, the bullish forecasts will prove accurate.But if you look at the long arc of economic history, such performance would be a remarkable aberration. That’s the argument that the Harvard economists Lant Pritchett and Lawrence H. Summers make in a new working paper. In short, past performance does not predict future results. What tends to happen, rather, is “reversion to the mean”: Countries having long periods of abnormal growth tend to revert to something around 2 percent growth, closer to the long-term global average.“China’s experience from 1977 to 2010 already holds the distinction of being the only instance, quite possibly in the history of mankind,” with sustained super-rapid growth for more than 32 years, they write. “Why will growth slow? Mainly, because that is what rapid growth does.”There are plenty of other China pessimists out there, who note everything from aging demographics to years of politically driven investment that may offer poor returns, to an economy trying to make the perilous transition away from investment spending and toward consumers. Just last week, a Conference Board report argued that China’s economy would slow as a credit and investment bubble deflated.

via China Will Keep Growing. Just Ask the Soviets. –

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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